Since the onset of the global financial crisis, there has been a pronounced shift
in the funding composition of banks in Australia. In particular, there has
been a move away from the use of wholesale debt securities, including securitisation,
towards domestic deposits. The crisis spurred banks, investors and regulators
globally to reassess funding risks, and the Australian banks have responded
to the resulting pressures to secure more stable funding sources. An increase
in the use of deposits has been evident across all types of banks in Australia,
although it has been most pronounced for the regional and other smaller Australian-owned
banks, which had previously used securitisation more heavily (Graph A1).
These banks have increased their share of deposits broadly across most products,
whereas most of the growth in the major and foreign-owned banks' deposits
(and the banking sector's deposits as a whole over recent years) has been
concentrated in term deposits. Reflecting greater competition, term deposits
now attract higher interest rates than a number of other forms of deposits
and wholesale debt securities of a similar maturity.[1]

Australian banks in aggregate have also slightly increased stable funding in the
form of long-term wholesale debt and this has been complemented by a sharp
fall in the share of short-term wholesale debt. Most of this decline was in
domestic debt; the share of domestic short-term debt in total bank funding
has declined from a peak of over 20 per cent in early 2008 to around 10 per
cent recently (Graph A2).
The share of short-term debt issued overseas has fallen somewhat less, from
a peak of 15 per cent of funding prior to the crisis to 12 per cent currently.
There are a number of possible reasons why the share of domestic short-term
debt has declined more than that of offshore short-term debt. Domestic investors
are likely to have had more opportunity to substitute away from short-term
debt securities, such as certificates of deposits, to term deposits offering
higher interest rates. Banks are also holding less of each other's securities
now than at the height of the global financial crisis. Additionally, as banks
have tried to increase the average maturity of their funding, they have been
relatively more inclined to reduce issuance of domestic short-term debt, which
typically has shorter maturities than short-term debt issued offshore because
the two investor bases have different preferences. Estimates suggest that the
average residual maturity of banks' offshore short-term wholesale debt
is around four months, while that of domestic debt is generally less than two
months. Within banks' offshore short-term funding, around half is debt
securities, mainly commercial paper, with the remainder being deposits whose
maturity characteristics will often be similar to that of debt securities (Table A1).

Long-term wholesale debt currently accounts for about 16 per cent of banks'
funding, up from a low of about 13 per cent in late 2007. Most of the
increase has been in domestic long-term debt; the share of offshore long-term
debt has been broadly unchanged since 2007. After rising initially following
the onset of the crisis, the share of long-term debt has declined a little
in the past year or so, as strong deposit growth and modest credit growth has
reduced the banks' wholesale funding requirements. Although the term to
maturity of newly issued bonds has increased, because issuance levels have
not been particularly high the average residual maturity of banks' long-term
wholesale debt has hardly changed in recent years, remaining at just over three
years (Graph A3).

Around 15 per cent of banks' liabilities are denominated in foreign currency,
with non-resident liabilities comprising around 90 per cent of this share.
The foreign currency share of banks' liabilities has fallen by about 3 percentage
points over the past two years. The long-standing and prudent practice of hedging
foreign-currency denominated exposures back into Australian dollars ensures
that fluctuations in exchange rates have little effect on domestic banks'
profits or equity.[2]

The funding composition of Australian banks can be compared with banks in other advanced
countries using a number of simple metrics, such as the wholesale funding ratio,
the customer deposit funding ratio, the foreign funding ratio and the loan-to-deposit
ratio. Cross-country comparisons are complicated by a lack of fully consistent
data, but some general observations based on estimates of these metrics for
different banking systems can still be made. The Australian banking system
has a wholesale funding ratio of about 34 per cent, which is similar to
Sweden, but higher than a number of other countries (Table A2). Euro
area banks have lower wholesale funding ratios but they also make more use
of interbank deposits than Australian banks; these deposits are not counted
as part of wholesale funding, but arguably share similar characteristics. US
and Canadian banks' certificates of deposit are not recorded as wholesale
funding, even though at least some investors in these instruments may behave
in a similar way. While wholesale funding is often assumed to be less stable
than customer deposit funding, a higher wholesale funding ratio for the Australian
banking system does not necessarily indicate higher funding risks – the
maturity and diversity of wholesale funding are also important factors to consider;
as noted earlier, some wholesale funding is at quite long terms. Also, because
an investor's decision to lend to a bank is largely based on a credit assessment
of the bank's assets, the Australian banks' fund-raising activities
in global capital markets has created a strong incentive for them to maintain
high credit ratings and sound asset quality, factors which improve the stability
of their funding base.[3]

Australian banks' use of foreign funding is also often singled out by some observers
as a potential source of vulnerability. However, the foreign funding ratio
for the Australian banking system is lower than for banking systems in Europe
outside the euro area, mainly because Australian banks raise little non-resident
deposit funding. Non-resident deposit funding can be less stable than domestic
deposits, as the recent experience of some euro area banking systems demonstrates
(see ‘The Global Financial Environment’
chapter). Also, as noted earlier, Australian banks hedge almost all of their
foreign currency denominated exposure to manage the foreign exchange risk.

The loan-to-deposit ratio for the Australian banking system is higher than those
for the other large advanced banking systems in
Table A2,
with the exception of the United Kingdom, though it is comparable to that in
Sweden. The Australian banks' ratio has declined significantly since the
onset of the global financial crisis, as deposit growth has outpaced credit
growth. Loan-to-deposit ratios can be misleading indicators of the vulnerability
of a bank's funding profile: very different ratios can apply to banks with
the same funding mix but different shares of banking and trading book assets
on their balance sheets. In the Australian banks' case, the relatively
high loan-to-deposit ratio partly reflects their lower share of trading book
assets. A low loan-to-deposit ratio is not necessarily an indicator of stability
as there are numerous instances over recent years where banks have invested
their ‘excess’ deposits in trading securities or other assets that
proved to be riskier than domestic loans.